The transportation sector and low-carbon growth pathways: modelling urban,infrastructure, and spatial determinants of mobility

This article contributes to the controversial debate over the effect of spatial organization on CO₂ emissions by investigating the potential of infrastructure measures that favour lower mobility in achieving the transition to a low-carbon economy. The energy–economy–environment (E3) IMACLIM-R model is used to provide a detailed representation of passenger and freight transportation. Unlike many of the E3 models used to simulate mitigation options, IMACLIM-R represents both the technological and behavioural determinants of mobility. By comparing business-as-usual, carbon price only, and carbon price combined with transport policy scenarios, it is demonstrated that the measures that foster a modal shift towards low-carbon modes and a decoupling of mobility needs from economic activity significantly modify the sectoral distribution of mitigation efforts and reduce the level of carbon tax necessary to reach a given climate target relative to a ‘carbon price only’ policy.

Policy relevance

Curbing carbon emissions from transport activities is necessary in order to reach mitigation targets, but it poses a challenge for policy makers. The transport sector has two peculiarities: a weak ability to react to standard pricing measures (which encourages richer policy interventions) and a dependence on long-lived infrastructure (which imposes a delay between policy interventions and effective action). To address these problems, a framework is proposed for analysing the role of transport-specific measures adopted complementarily to carbon pricing in the context of international climate policies. Consideration is given to alternative approaches such as infrastructure measures designed to control mobility through less mobility-intensive denser agglomerations, investment reorientation towards public mode, and logistics reorganization towards less mobility-dependent production processes. Such measures can significantly reduce transport emissions in the long term and hence would moderate an increase in the carbon price and reduce its more important detrimental impacts on the economy.     

Escaping the climate policy uncertainty trap: options contracts for REDD+

Climate policy uncertainty significantly hinders investments in low-carbon technologies, and the global community is behind schedule to curb carbon emissions. Strong actions will be necessary to limit the increase in global temperatures, and continued delays create risks of escalating climate change damages and future policy costs. These risks are system-wide, long-term and large-scale and thus hard to diversify across firms. Because of its unique scale, cost structure and near-term availability, Reducing Emissions from Deforestation and forest Degradation in developing countries (REDD+) has significant potential to help manage climate policy risks and facilitate the transition to lower greenhouse gas emissions. ‘Call’ options contracts in the form of the right but not the obligation to buy high-quality emissions reduction credits from jurisdictional REDD+ programmes at a predetermined price per ton of CO₂ could help unlock this potential despite the current lack of carbon markets that accept REDD+ for compliance. This approach could provide a globally important cost-containment mechanism and insurance for firms against higher future carbon prices, while channelling finance to avoid deforestation until policy uncertainties decline and carbon markets scale up.

Key policy insights

• Climate policy uncertainty discourages abatement investments, exposing firms to an escalating systemic risk of future rapid increases in emission control expenditures.

• This situation poses a risk of an abatement ‘short squeeze,’ paralleling the case in financial markets when prices jump sharply as investors rush to square accounts on an investment they have sold ‘short’, one they have bet against and promised to repay later in anticipation of falling prices.

• There is likely to be a willingness to pay for mechanisms that hedge the risks of abruptly rising carbon prices, in particular for ‘call’ options, the right but not the obligation to buy high-quality emissions reduction credits at a predetermined price, due to the significantly lower upfront capital expenditure compared to other hedging alternatives.

• Establishing rules as soon as possible for compliance market acceptance of high-quality emissions reductions credits from REDD+ would facilitate REDD+ transactions, including via options-based contracts, which could help fill the gap of uncertain climate policies in the short and medium term.

     

New lessons for technology policy and climate change: investment for innovation

The direction of UK energy policy requires a renewed impetus if the goal of climate change stabilization is to be met. Cost is not the main issue: a transformation to a low-carbon energy system may be no more expensive than meeting future energy demands with fossil fuels. Institutional barriers are preventing the large-scale adoption of the necessary technologies. New institutions to promote low-carbon technologies have not yet led to investment on the necessary scale. Further changes to the operation of the UK electricity markets to create a ‘level playing field’ for small-scale and intermittent generation are necessary. UK policy can contribute to international agreements following on from the Kyoto Accord, which also need to address the institutional barriers to energy technology development and transfer.     

Triggering the low-carbon transition in the aftermath of the global financial crisis

An assessment of the post-Kyoto climate change negotiations, and the altered role of climate finance post-financial crisis, is presented. First, the paradigm shift of the Cancun Agreements is examined from an historical perspective and it is shown that the impasse in the negotiations, caused by the underlying over-emphasis on burden sharing reductions in emissions, can be overcome. Second, using information from two modelling exercises, it is demonstrated how climate finance can encourage the decoupling of carbon emissions from economic growth and thereby help align the development pattern with global climate goals. Third, a framework to place carbon finance within current discussions is sketched regarding both the reformation of the world financial systems and the facilitation of a sustainable economic recovery that is beneficial for North and South while addressing the low-carbon transition. It is concluded that upgrading climate finance is the key to triggering the shift to a low-carbon society and a system is proposed in which an agreed social cost of carbon is used to support the establishment of carbon emissions certificates to reorient a significant portion of global savings towards low-carbon investments.

Policy relevance

Investments that align development and climate objectives are shown to substantially lower the social cost of carbon and deliver long-term carbon emissions reductions. These reductions are greater than those contributed by the sole carbon price signal generated by a world cap-and-trade system. Carbon finance, as a part of the broader reform of financial systems and overseas aid, can help overcome the dual adversity of climate and financial crisis contexts. The carbon certificate, with an upfront agreed social cost of carbon, can be used as its instrument. The portion of the banking system that intends to reorient a significant part of world savings towards low-carbon investments could thus issue such carbon certificates. By giving carbon assets the status of a reserve currency, the system could even respond to the need of emerging countries to diversify their foreign exchange reserves and trigger a wave of worldwide sustainable growth through infrastructure markets.     

Empirical calibration of climate policy using corporate solvency: a case study of the UK’s carbon price support

Emission reductions improve the chances that dangerous anthropogenic climate change will be averted, but could also cause some firms financial distress. Corporate failures, especially if they are unnecessary, add to the social cost of abatement. Social value can be permanently destroyed by the dissolution of organizational capital, deadweight losses paid to liquidators, and unemployment. This article proposes using measures of corporate solvency as an objective tool for policy makers to calibrate the optimal stringency of climate change policies, so that they can deliver the least loss of corporate solvency for a given level of emission reductions. They could also be used to determine the generosity of any compensation to address losses to corporate solvency. We demonstrate this approach using a case study of the UK’s Carbon Price Support (a carbon tax).

Key policy insights

• Solvency metrics could be used to empirically calibrate the optimal stringency of climate policies.

• An idealized solvency trajectory for firms affected by climate change policy would cause corporate solvency to initially decline – approaching but not exceeding ‘distressed’ levels – and then gradually improve to a new ‘steady state’ once the low-carbon transition had been achieved.

• In terms of the UK’s Carbon Price Support, corporate solvency of energy-intensive industries was found to be stable subsequent to its introduction. Therefore, the available evidence does not support its later weakening.

     

Climate change,innovation and jobs

The employment effect of climate policy has emerged as an important concern of policy makers, not least in the USA. Yet the impact of climate policy on jobs is complex. In the short term, jobs will shift from high-carbon activities to low-carbon activities. The net effect could be job creation, as low-carbon technologies tend to be more labour-intensive, at least in the short term until efficiency gains bring down costs. In the medium term, the effect will be felt economy-wide as value chains and production patterns adjust. This effect is more difficult to gauge, particularly if climate policy is unilateral and trade effects have to be taken into account. However, the biggest effect is expected to be long term, when climate policy will trigger widespread structural adjustment. Such episodes of ‘creative destruction’ are often associated with innovation, job creation and growth.     

Public policy, institutional investors and climate change: a UK case-study

Institutional investors have two important roles to play in encouraging companies to address the risks and take advantage of the opportunities presented by climate change. The first is through using their influence as shareholders to encourage companies to adopt more proactive approaches to managing the risks and opportunities presented by climate change. The second is through explicitly factoring climate change risks and opportunities into ‘mainstream’ investment analysis processes. While there is growing investor activity on the former, the integration of climate change into investment analysis remains confined to sectors where there are strong government incentives (e.g. for renewable energy) or where greenhouse gas emissions have a market price. This article reviews the evolution of UK institutional investor interest in climate change from 1990 to 2005, focusing in particular on the relative contributions of ‘soft’ policy measures such as information-disclosure and awareness raising, and ‘hard’ policy measures such as regulation and market-based instruments. The article concludes that, over this period, soft policy measures played an important role in encouraging investors to discuss climate change issues with companies, but had minimal influence on investment decisions. It was only with the introduction of hard policy measures that climate change started to be systematically factored into investment analysis. The article canvasses the implications of these findings for government efforts in the UK and elsewhere to encourage investors to play a more proactive role in the climate change debate. It also considers the role that institutional investors themselves can play in strengthening public policy measures to reduce greenhouse gas emissions.     

Reflections on Delhi

The ‘efficiency paradox’ has generated controversy and suggests that mainstream economics is not neutral in the way it deals with climate change. An alternative economic framework, evolutionary economics, is used to investigate this crucial issue and offer insights into the development of a complementary framework for designing climate policy and for managing the transition to a low-carbon society. The evolutionary framework allows us to identify the presence of two sources of inertia (i.e. at the individual level through ‘habits’ and at the level of socio-technical systems) that mutually reinforce each other in a path-dependent manner. To overcome ‘carbon lock-in’, decision-makers should design measures (e.g. commitment strategies, niche management) that specifically target those change-resisting factors, as they tend to reduce the efficiency of traditional instruments. A series of recommendations for policy-makers is provided.     

The political economy of carbon markets: The CDM and other stories

Despite ongoing faith in their ability to deliver meaningful reductions in GHG emissions as the Durban climate summit approaches in December 2011 and as the end of the first commitment period of the Kyoto Protocol in 2012 looms large, carbon markets have been adversely affected by low prices that are failing to drive necessary investment in low-carbon technology and a series of scandals about their integrity. Some Clean Development Mechanism (CDM) projects have nevertheless delivered reductions in GHG emissions and sustainable development benefits. However, these benefits are too few, and strong incentives still remain in place to go for ‘low-hanging fruit’ opportunities that bring few additional environmental and developmental gains. Although governance reforms have a part to play in addressing these issues, these are not teething problems that can be easily weeded out with further institutional learning and innovation. They touch on the deeper politics of carbon markets and the role politics play in responses to climate change that have to be addressed.     

Which policy instruments attract foreign direct investments in renewable energy?

Reducing GHG emissions and mitigating climate change would require significant investments in renewable energy technologies. Foreign direct investments (FDI) in renewable energy (RE) have increased over the last years, contributing to the diffusion of RE globally. In the field of climate policy, there are multiple policy instruments aimed at attracting investments in renewable energy. This article aims to map the FDI flows globally including source and destination countries. Furthermore, the article investigates which policy instruments attract more FDI in RE sectors such as solar, wind and biomass, based on an econometric analysis of 137 Organisation for Economic Co-operation and Development (OECD) and non-OECD countries. The results show that Feed in Tariffs (FIT) followed by Fiscal Measures (FM), such as tax incentives and Renewable Portfolio Standards (RPS), are the most significant policy instrument that attract FDI in the RE sector globally. Regarding carbon pricing instruments, based on our analysis, carbon tax proved to be correlated with high attraction of FDI in OECD countries, whereas Emissions Trading Schemes (ETS) proved to be correlated with high attraction of FDI mainly in non-OECD countries.

Key policy insights

• Feed in Tariffs is the most significant policy instrument that attracts FDI in the Renewable Energy sector globally.

• Fiscal Measures (FM), such as tax incentives, show a significant and positive impact on renewable energy projects by foreign investors, and particularly on solar energy.

• Carbon pricing instruments, such as carbon taxation and emissions trading, proved to attract FDI in OECD and non-OECD countries respectively.

• Public investments, such as government funds for renewable energy projects, proved not as attractive to foreign private investors, perhaps because public funds are not perceived as stable in the long run.

     

Quantifying the UK's incentives for low carbon investment

Abstract

The UK climate change programme has introduced a range of instruments to foster investment in low carbon technologies and markets. We estimate the total value of these interventions, in terms of the redirection of financial flows and directly foregone tax income, to be about £1.3 billion per year (c. Euro or US$ 2 billion per year), as from 2002 to 2003 when the renewable obligation certificates (ROCs) first take effect. About 20% of this consists of direct expenditure, the remaining 80% is in the form of indirect expenditures contained within sectors (ROCs, the energy efficiency commitments), and foregone tax revenues. Most of the energy-efficiency investment is estimated to recoup expenditure within normal life-cycles and may thus be considered profitable; the profitability of the supply-side interventions is predicated mostly upon expected cost reductions associated with the build up of the associated industries.     

Quantifying the UK’s incentives for low carbon investment

The UK climate change programme has introduced a range of instruments to foster investment in low carbon technologies and markets. We estimate the total value of these interventions, in terms of the redirection of financial flows and directly foregone tax income, to be about £1.3 billion per year (c. Euro or US$ 2 billion per year), as from 2002 to 2003 when the renewable obligation certificates (ROCs) first take effect. About 20% of this consists of direct expenditure, the remaining 80% is in the form of indirect expenditures contained within sectors (ROCs, the energy efficiency commitments), and foregone tax revenues. Most of the energy-efficiency investment is estimated to recoup expenditure within normal life-cycles and may thus be considered profitable; the profitability of the supply-side interventions is predicated mostly upon expected cost reductions associated with the build up of the associated industries.     

Low-carbon transition risks for India’s financial system

As the low-carbon transition accelerates, loans to and investments in carbon-intensive assets, firms and sectors are at risk of not generating the anticipated returns, with implications for individual financial institutions as well as financial markets more broadly. However, research on this topic has largely been focused on high- and upper-middle income economies to date. In this paper, we explore the salience of this issue in India – one of the world’s largest emitters and economies – by asking: (1) how extensive is financial-sector exposure to transition risks? And: (2) are finance professionals and financial institutions taking sufficient action to manage those transition risks? Our findings reveal that India’s financial sector is much more heavily exposed to low-carbon transition risks than standard borrowing classifications might suggest. For example, our granular assessment of individual loans and bonds finds that three-fifths of lending to the ‘mining’ sector is for oil and gas extraction, while one-fifth of ‘manufacturing’ debt is for petroleum refining and related industries. We also find that electricity production – by far the largest source of emissions – accounts for 5.2% of outstanding credit, but that only 17.5% of this lending is to pureplay renewables. Yet our survey of India’s largest financial institutions suggests that there have been limited efforts to identify, measure or manage low-carbon transition risks. Fewer than half of the 154 finance professionals surveyed were familiar with environmental issues including climate change mitigation and adaption, greenhouse gas emissions or transition risks. Only four of the ten major financial institutions surveyed collect information on ESG risks, and these firms do not systematically incorporate that data into business continuity planning, internal capital adequacy assessment processes, credit risk assessments, enterprise risk management frameworks or loan product pricing. Given extensive financial-sector exposure to low-carbon transition risks coupled with the absence of bottom-up action to manage those risks, our findings suggest that financiers, regulators and policymakers in emerging and developing economies should be acting swiftly to ensure an orderly transition to net-zero.     

Difficulties in accounting for private finance in international climate policy

It is widely acknowledged that private finance has a key role to play in achieving low-carbon development and resilience to climate change. However, while there have been several studies that have closely examined the data on public climate finance, there have been few such studies of the private climate-related finance data. There is a political dimension to accounting for ‘private finance’ given the commitment of industrialized countries – enshrined in the Copenhagen Accord and the Cancun Agreements – to mobilize US$100 billion of public and private finance for developing countries by 2020, on an annual basis. The availability and quality of data for different types of private climate finance flows with climate benefits (investments, carbon market payments, and voluntary funding) are analysed, and these flows are assessed according to various criteria for inclusion in the $100 billion figure. While existing data suggest that private climate finance invested in developing countries and mobilized by industrialized countries might currently be in the range of $27–123 billion per year, this number is a questionable point of reference. Existing data are limited and of very poor quality: definitions of ‘private climate finance’ are missing and data are hardly verified. Therefore, policy makers will first have to clearly define ‘private climate finance’ and develop systems for measuring, reporting, and verifying it, before using private finance numbers in international climate agreements.     

To tax,or not to tax: preferences for climate policy attributes

Many countries around the world respond to global warming and its consequences with various policy instruments. In the economic literature, policy instruments have typically been analysed with respect to efficiency, but little effort has been expended to understand public preferences for these instruments. In an internet-based choice experiment to address this shortcoming, Swedes were asked to choose between two alternative hypothetical policy instruments, each of which reduces CO₂ emissions by the same amount. The hypothetical policy instruments were characterized by a number of specific attributes. By varying the levels of each of the attributes, respondents indirectly reveal their preferences for these attributes. Half of the respondents are faced with choices labelled ‘tax’ and ‘other’, and the other half are faced with unlabelled choices (hypothetical instruments). The results show that Swedes tend to dislike the term ‘tax’ and show a preference for instruments with a positive effect on environment-friendly technology and climate awareness. A progressive-like cost distribution is preferred to a regressive cost distribution, and the private cost is negatively related to the choice of policy.     

Unleakable carbon†

Unleakable carbon, or the uncombusted methane and carbon dioxide associated with fossil fuel systems, constitutes a potentially large and heretofore unrecognized factor in determining use of Earth’s remaining fossil fuel reserves. Advances in extraction technology have encouraged a shift to natural gas, but the advantage of fuel switching depends strongly on mitigating current levels of unleakable carbon, which can be substantial enough to offset any climate benefit relative to oil or coal. To illustrate the potential warming effect of methane emissions associated with utilizable portions of our remaining natural gas reserves, we use recent data published in peer-reviewed journals to roughly estimate the impact of these emissions. We demonstrate that unless unleakable carbon is curtailed, up to 59–81% of our global natural gas reserves must remain underground if we hope to limit warming to 2°C from 2010 to 2050. Successful climate change mitigation depends on improved quantification of current levels of unleakable carbon and a determination of acceptable levels of these emissions within the context of international climate change agreements.

Policy relevance

It is imperative that companies, investors, and world leaders considering capital expenditures and policies towards continued investment in natural gas fuels do so with a complete understanding of how dependent the ultimate climate benefits are upon increased regulation of unleakable carbon, the uncombusted carbon-based gases associated with fossil fuel systems, otherwise referred to as ‘fugitive’, ‘leaked’, ‘vented’, ‘flared’, or ‘unintended’ emissions. Continued focus on combustion emissions alone, or unburnable carbon, undermines the importance of assessing the full climate impacts of fossil fuels, leading many stakeholders to support near-term mitigation strategies that rely on fuel switching from coal and oil to cleaner burning natural gas. The current lack of transparent accounting of unleakable carbon represents a significant gap in the understanding of what portions of the Earth’s remaining global fossil fuel reserves can be utilized while still limiting global warming to 2°C. Successful climate change mitigation requires that stakeholders confront the issue of both unburnable and unleakable carbon when considering continued investment in and potential expansion of natural gas systems as part of a climate change solution.     

Governing-by-aspiration? Assessing the nature and implications of including negative emission technologies (NETs) in country long-term climate strategies

In order to address the pressing challenge of climate change, countries are now submitting long-term climate strategies to the United Nations Framework Convention on Climate Change (UNFCCC) process. These strategies include within them potential future use of ‘negative emissions technologies’ (NETs). NETs are interventions that remove carbon from the atmosphere, ranging from large-scale terrestrial carbon sequestration in forests, wetlands and soils, to use of carbon capture and storage technologies. We assess here how NETs are discussed in 29 long-term climate strategies, in order to ascertain the risk that including the promise of future NETs may delay the taking of short-term mitigation actions. Our analysis shows that almost all countries plan to rely on NETs, particularly enhanced use of natural carbon sinks, even as a wide array of challenges and trade-offs in doing so are highlighted. Many strategies call for improved accounting systems and market incentives in realizing future NETs. While no strategy explicitly suggests that NETs can be a substitute for short-term mitigation, most estimate substantial potential for future use of NETs even in the face of acknowledged uncertainties. This, we suggest, may have the consequence of resulting in what we describe here as ‘a spiral of delay’ characterized by the promise of future NET options juxtaposed with the simultaneous uncertainty around these future options. Our analysis highlights that this inter-connected delaying dynamic may be intrinsic to what we term ‘governing-by-aspiration’ within global climate politics, wherein the voicing of lofty future ambition risks replacing current action and accountability.     

Brazil beyond 2020: from deforestation to the energy challenge

The main assumptions and findings are presented on a comparative analysis of three GHG long-term emissions scenarios for Brazil. Since 1990, land-use change has been the most important source of GHG emissions in the country. The voluntary goals to limit Brazilian GHG emissions pledged a reduction in between 36.1% and 38.9% of GHG emissions projected to 2020, to be 6–10% lower than in 2005. Brazil is in a good position to meet the voluntary mitigation goals pledged to the United Nations Framework Convention on Climate Change (UNFCCC) up to 2020: recent efforts to reduce deforestation have been successful and avoided deforestation will form the bulk of the emissions reduction commitment. In 2020, if governmental mitigation goals are met, then GHG emissions from the energy system would become the largest in the country. After 2020, if no additional mitigation actions are implemented, GHG emissions will increase again in the period 2020–2030, due to population and economic growth driving energy demand, supply and GHG emissions. However, Brazil is in a strong position to take a lead in low-carbon economic and social development due to its huge endowment of renewable energy resources allowing for additional mitigation actions to be adopted after 2020.

Policy relevance

The period beyond 2020 is now relevant in climate policy due to the Durban Platform agreeing a ‘protocol, legal instrument or agreed outcome with legal force’ that will have effect from 2020. After 2020, Brazil will be in a situation more similar to other industrialized countries, faced with a new challenge of economic development with low GHG energy-related emissions, requiring the adoption of mitigation policies and measures targeted at the energy system. Unlike the mitigation actions in the land-use change sector, where most of the funding will come from the national budgets due to sovereignty concerns, the huge financial resources needed to develop low-carbon transport and energy infrastructure could benefit from soft loans channelled to the country through nationally appropriate mitigation actions (NAMAs).     

Global climate policy and deep decarbonization of energy-intensive industries

If we are to limit global warming to 2 °C, all sectors in all countries must reduce their emissions of GHGs to zero not later than 2060–2080. Zero-emission options have been less explored and are less developed in the energy-intensive basic materials industries than in other sectors. Current climate policies have not yet motivated major efforts to decarbonize this sector, and it has been largely protected from climate policy due to the perceived risks of carbon leakage and a focus on short-term reduction targets to 2020. We argue that the future global climate policy regime must develop along three interlinked and strategic lines to facilitate a deep decarbonization of energy-intensive industries. First, the principle of common but differentiated responsibility must be reinterpreted to allow for a dialogue on fairness and the right to development in relation to industry. Second, a greater focus on the development, deployment and transfer of technology in this sector is called for. Third, the potential conflicts between current free trade regimes and motivated industrial policies for deep decarbonization must be resolved. One way forward is to revisit the idea of sectoral approaches with a broader scope, including not only emission reductions, but recognizing the full complexity of low-carbon transitions in energy-intensive industries. A new approach could engage industrial stakeholders, support technology research, development and demonstration and facilitate deployment through reducing the risk for investors. The Paris Agreement allows the idea of sectoral approaches to be revisited in the interests of reaching our common climate goals.

Policy relevance

Deep decarbonization of energy-intensive industries will be necessary to meet the 2 °C target. This requires major innovation efforts over a long period. Energy-intensive industries face unique challenges from both innovation and technical perspectives due to the large scale of facilities, the character of their global markets and the potentially high mitigation costs. This article addresses these challenges and discusses ways in which the global climate policy framework should be developed after the Paris Agreement to better support transformative change in the energy-intensive industries.